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China economy needs a dose of 'acupuncture': Ex-PBOC adviser

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Forget big-bang stimulus, China needs "acupuncture-style" treatment to heal its economy that is headed for its slowest pace of expansion in a quarter of a century, says Li Daokui, former adviser to the People's Bank of China.

"The timing is right for the central policymakers to put together what I call acupuncture-style stimulus, not massive stimulus, to restart the economy," Li told CNBC on the sidelines of the World Economic Forum in Dalian, China, referring to the ancient Chinese practice of inserting thin needles into the body at specific points for pain relief.

The stimulus needs to hit "key nerve points of the economy" without upsetting its overall tempo, Li, who is now a professor at Tsinghua University, said.

China's economy has slackened considerably in recent months, with some economists now projecting growth could fall below 7 percent in the third quarter. The world's second largest economy expanded 7 percent in the first and second quarter.

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Li's plan for providing relief for the floundering economy is comprised of three targeted components.

First off, borrowing costs need to come down further, he said. The central bank has cut interest rates five times since November; however, they have not fully filtered through to market rates.

"China still has tremendously high real interest rates, [we're] talking about 8-9 percent lending rates at which local governments are borrowing."

Second, the government needs to push through stalled infrastructure projects, he said. Infrastructure projects have hit roadblocks as heavily indebted local governments struggle to finance them in the face of slower growth.

Finally, reform of the country's inefficient state-owned enterprises (SOEs) must be made a priority, he concluded.

Critics say the sheer size and market dominance of big state firms creates a drag on the economy through vast opportunities for waste and corruption. State-owned companies enjoy privileged access to low-cost credit and draw more than 35 percent of total bank loans, according to Reuters.

-Reuters contributed to this report